Combined finances of union and states, Microeconomics

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Taxes on goods and services are levied in India in various forms and at different levels of Government, Centre, states, and local bodies. Among the taxes that are leviable on goods and services, are customs and excises levied by the Centre and sales taxes levied by the states. These three taken together account for about 70 per cent of the total tax revenue and over 80 per cent of the aggregate revenue from indirect taxes. Indirect taxes are taxes on goods and services have for a long time been the dominant source of Government revenue in India, and their significance has grown sharply after Independence. The increase that has taken place in the level of taxation in the Indian economy over the past five decades - from 6.3 per cent of GDP in 1950 -51 to nearly 16 per cent at the end of century is attributable almost wholly to indirect taxes. While direct taxation has remained at around 2.3 to 3.6 per cent of GDP, the ratio of indirect taxes has risen from 4.0 to over 12 per cent. Predominance of indirect taxes is a well-known characteristic of India's tax structure. Factors responsible for this are: (i) dominance of the unorganised sector, (ii) poor literacy level, (iii) absence of standard accounting practices, (iv) low level of per capita income, and (v) problems inherent in the economy which create many administrative problems. Therefore, governments usually fall back on taxes on foreign trade, on the one hand, and on domestic production and trade, on the other, to meet the revenue requirements.    

Direct taxes of the combined Government sector (Centre and States put together) which constituted about 27 per cent, on an average, of the total tax revenues during the three decades of the fifties to seventies, eroded to about 15 per cent during the 1980s and remained at around 16 per cent, on an average, during the 1990s so far. One of the major problems in Government finances pertains to the constraints in raising resources through tax and non-tax measures. With the ongoing fiscal reforms there has been some improvement in direct tax collection. Non-tax revenue has not shown any noticeable increase. Moreover, the non-tax revenue generation process is hampered by the high quantum of subsidies both hidden and explicit.

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